June 28, 2010

Supreme Court Rejects Tenure Provisions of PCAOB

The Supreme Court ruled 5 to 4 on June 28, 2010, that the tenure provisions of the Public Company Accounting Oversight Board (PCAOB), which was created as part of a series of accounting reforms in the Sarbanes-Oxley Act of 2002, are incompatible with the Constitution’s separation of powers.

The PCAOB is composed of five members appointed by the Securities and Exchange Commission (SEC). While the SEC has oversight of the board, it cannot remove members at will, but only for good cause. The President, meanwhile, can only remove commissioners for “inefficiency, neglect of duty, or malfeasance in office.”

Writing for the majority in Free Enterprise Fund v. Public Company Accounting Oversight Board, Chief Justice John Roberts stated that “such multilevel protection from removal is contrary to Article II’s vesting of the executive power of the President.”

Roberts added that if allowed to stand, “this dispersion of responsibility could be multiplied. If Congress can shelter the bureaucracy behind two layers of good-cause tenure, why not a third?” He noted that during earlier oral arguments, the government was unwilling to concede that even five layers between the President and the PCAOB would be too many.

“The Sarbanes-Oxley Act remains ‘fully operative as a law’ with the tenure restrictions excised,” Roberts stated. As a result of the ruling the PCAOB will continue to function as before, except that the SEC will now have authority to remove members at will.